Why Corporate Regulation is a Socioenvironmental Necessity. Part 5 of 5: How do We Create a Diverse and Stable Economic System?

Welcome to the belated final installment of our five part analysis. We have been working towards the title’s conclusion by seeking an answer to the following question.

What difference between natural / social, and economic, systems causes one to tend towards diversity and stability, and the other, uniformity and instability?

In installments 1, 2 and 3, we proposed that in natural / social systems a species or ‘group’ seeking total domination of their environment are constrained and, ultimately, destroyed by the impoverishing and destabilising effects of their actions on the systems upon which their own survival depends, thus leaving the arena open for dynamics that promote diversity and long-term stability (see previous installments if you need an explanation of the model below).

In installment 4 we suggested that the current economic system displays a reverse trend towards uniformity and instability because it allows the small ‘groups’ at the helms of corporations to gain increasing wealth and power from disintegrating social / natural systems without ever personally experiencing the environmental backlash of their actions. (see installment 4 if you need an explanation of the model below).

To clarify, this shouldn’t be taken as a demonisation of businessmen. Some individuals are naturally entrepreneurial, status-driven or materially-oriented, and the prosperity and order we have come to enjoy in recent centuries are largely indebted to their spirit and energy. Indeed, there are few among us that wouldn’t pass up a lottery win and the prestige, security and freedom it affords.

However, in the current era, unconstrained profit-and-power motivated vicious cycles represent a mortal threat to our freedom of choice,  quality of life and, most urgently, our planet’s life systems. If the virtuous feedback mechanisms that promote diversity and stability in natural / social systems do not function naturally in the current economic system, then they they must be imposed artificially with due haste. But how?

First let’s summarise, in a nutshell, the problem to be resolved…

In the current economic system, dominant ‘groups’ are able to benefit from abusing the diversity and stability of socioenvironmental systems without ever experiencing negative feedback from their actions.  

Although many possible interventions occurred to Arkadian whilst writing this series, a coherent regulatory model, which offered an unobjectionable, easy transition from the current economic system was not so easy to imagine (the reason why the final installment has been so long in coming!). Happily, a fully-formed (40yr old) solution presented itself recently in Chapter 19 of ‘Small is Beautiful’, courtesy of the genius of economist, E.F. Schumacher (pictured left).

The Schumacher Business Model, stated simply, rests on 2 systemic ‘tweaks’: (1) limiting the number of people a single corporate entity can employ and (2) introducing meaningful public ownership and accountability into business structure and practice.

(1) Legally restricting corporation size by number of employees. It would seem reasonable that a ceiling should be dictated chiefly by evidence regarding effective human group size (see Dunbar’s number), say between 80-200 persons. Growth beyond the upper limit, Schumacher suggests, should entail the formation of new independent corporate units, which may be linked by joint stock. These restrictions would enable each employee to ’embrace the idea of the business as a whole’ and the value of their role therein, but most importantly to the current argument, it would ensure that ‘the group (i.e. The Board)’ couldn’t claim ignorance of the details of their company activities and, thus, could reasonably be held personally accountable for abuses. 

Furthermore, constraining size, particularly when the exploitation of natural / social resources is involved, is also more likely to physically ground a corporation in a local environment. Bringing ‘the group’ closer to their employees and the raw coal face of their realworld transactions is likely to increase their susceptibility and responsiveness to negative socioenvironmental feedback both internal and external to their organisation. It is also liable to curb the scale of impacts of which a single corporate vehicle is capable.

All very well, the cynics may cry, but what of the ‘groups’ with the thicker skins and thinner moral fibre?

(2) Public Ownership and Accountability. Schumacher advises we put an end to annual corporate taxation (a proposition not disagreeable to most businessmen!). In its place he proposes that for every share sold privately by a company, a further share is issued to the public. Thus, as owner of 50% of the company, we’d collectively receive half of any dividends if and when they are paid out to shareholders (he argues that when a company grows beyond a certain size it loses its ‘private and personal character’ and thus can be considered, in a sense, a public enterprise anyway).

To avoid disruption, our public equity wouldn’t allow us any voting rights in everyday business decision-making. It would, however, entitle us to attend Board meetings as an observer and, if the actions of the business were deemed to run counter to the public or environmental interest, we could apply to a court to get dormant voting rights activated.

To exercise these corporate responsibilities, Schumacher proposes the creation of independent citizen bodies funded from local business dividends. These ‘Social Councils’ would be split into four equal parts: three would have their members nominated by local trade unions, professional, and environmental, organisations, with the final quarter being drawn randomly from local residents in the manner of jury service. Involvement in management processes would, of course, be bound by strict confidentiality agreements.

Schumacher’s model brings socioenvironmental feedback directly into the Board room both as a ‘possibility in the background’ and, when necessary, as a real, prevailing constraint.

It is Arkadian’s prediction that, over time, exposing the ‘groups’ at the corporate helm to these balancing dynamics would drive a new trend towards macroeconomic diversity and stability, and greater corporate responsibility for the integrity of the natural environment (by triggering the ‘Diversity Engine’, described in installments 1, 2 and 3). And to top it all, it would require minimal design and economic / legal restructuring because, in the main, the model utilises existing frameworks and practices.

To conclude, effective corporate regulation is not just a Utopian nice-t0-have. It took till 1960 for World Population to hit 3bn. It has grown by 1bn approximately every 12yrs since, probably hitting the 7bn mark earlier this year. There are more human beings to house and feed today than have ever lived before. Presently, we have just over 2 acres of workable land each, 4x less than a century ago, and this is shrinking each moment as corporate activities and climate change destroy the natural world, and population continues to skyrocket.

Resultant biodiversity loss, whilst often second-ranked in current ‘problem’ trends is, as we’ve established, probably the most dangerous of all due to its inscrutable relationship with macroenvironmental instability. With extinctions currently at 1000x the background base rate, and predicted to rise to 10,000x over this century, we are very rapidly, and very blindly, removing the Jenga pieces of our life systems, largely for the sake of the short-term wealth creation of the small ‘groups’ of the corporate elite.  History is littered with exemplars of total societal and environmental meltdown as the result of human impact on vulnerable ecosystems: Easter Island, The Mayans, The Pueblo Culture of the South Western USA, the Norse Greenland and Iceland colonies to name but a few. If we repeat the same mistakes globally, we may not get a second chance.

Considering the twin pincers of population growth and biodiversity loss, it is quite evident that socioenvironmental stability and sustainability are our most important objectives for the c21st, bar none. Our very survival depends on achieving them and success is contingent upon economic and environmental policy which is underpinned by the principle of diversity=stability=good. If variety is both the spice and source of life, then we must put democratic pressure upon Government and business to make the small tweaks to our economic system necessary for it to produce abundance by its own workings.

For a fascinating and vitally important lesson in the importance of preserving and promoting biodiversity, Arkadian cannot recommend the video below more highly. Essential viewing for all inhabitants of Planet Earth.

The Root of all Evil: how the UK Banking System is ruining everything and how easily we can fix it.

Whilst no economics ‘expert’, it has become clear to Arkadian from evidence presented by organisations such as Positive Money and the New Economics Foundation that the UK Banking System is (i) rapidly driving us into a new Dark Age and (ii) not nearly as difficult to understand as those with a vested interest in it would have us believe.

As positive change depends on a general understanding, the current article aims to compare, in simple terms, how this system has worked in the past, and should work, and how it works currently to the detriment of you, your children, your community and your future.

HOW IT WORKED (THE VIRTUOUS CIRCLE): 

To begin, lets look at a diagram of how the UK economy worked in the years following WWII. At that time the country, as now, was stone broke but, unlike now, was driven by people-centred values sharpened in response to the Axis Power’s policies of dehumanisation. It is also a model of a ‘classic’ Capitalist System, as described by Adam Smith. Most people, and politicians, still mistakenly believe it works this way.

The arrows represent the flow of money, and the boxes: important ‘variables’ in the system. You can start anywhere, but it’s probably easiest to start with the box to the left.

1. Disposable vs Borrowed Income. You made a decent living in a secure job-for-life that allowed plenty of free time for friends and family. Your mortgage aside – which took around 10-15yrs max to pay off – you only bought things if and when you could afford them, thus putting money back into ‘circulation’ (arrow 1A). The remainder went into your savings account or share investments (arrow 1B) …

2. Money and Power: People vs Banks. …Banks were dependent on your savings to function as they were only permitted to lend in relation to their cash reserves. Their business worked by making money from the interest on these loans…

3. Lending for Productivity vs Quick-Win Low-Risk…As banks were still very much focused at a High Street level, much of their investment went into small businesses…

4. Healthy vs Toxic Economy…Thus your savings helped foster a growing, diversifying and stable local economy, which meant more secure jobs and, coming full circle, (1) more disposable income for other people to spend or save as well as a range of other social benefits associated with greater income equality.

5. Government, meanwhile, ‘governed’ the system to ensure it worked properly. In partnership with the Bank of England, they monitored the economy, periodically injecting new printed cash into the system to fill the ‘gap’ created by new growth, via public services that safeguarded citizens’ life dependencies (energy, social security, education, policing, health, telecoms, transport, postal service, military) and provided reliable employment for millions. They also regulated the banks to ensure they lent justly and responsibly.

And so it worked, by no means a well-oiled machine but still one guided by principles of fairness, general well-being, and economic restraint. So what’s changed?

HOW IT WORKS NOW (THE VICIOUS CIRCLE). 

1. Borrowed vs Disposable Income. Whilst you (unlike many) may still make a decent living, you and your partner work doubly-hard out of fear of losing your jobs and being unable to meet your mortgage and debt repayments.

In your absence, your children are raised largely by others. Even when you’re home, it’s tough to find energy for them when what you need is relaxation from the stresses and strains. The cost of a property sufficient to comfortably house your family has meant you’re probably destined to spend your whole life surviving on credit and without savings…

2. Money and Power: Banks vs People…But isn’t ‘no savings’ an issue for the banks? Not anymore! Now, when you need to borrow, they are free to tap the number into a spreadsheet and create it for you out of thin air, irrespective of the amount of ‘savings’ in their reserves  (arrow 1B) . They also decide your interest rate: the ‘money-for-nothing’ (quite literally) from which they’ve grown rich, politically-powerful and monolithic…

3. Quick-Win Low-Risk vs Lending for Productivity…And these global giants no longer have time for long-term, high-risk investment, such as small or ‘ethical’ businesses. They plough your ‘interest’ into quick-win low-risk high-return investments, which are safely recoupable should anything go belly up.

Around 90% goes int0 speculation, contributing virtually nothing to the economy, and, in the case of the food and currency markets, causing the suffering and deaths of millions in poorer countries. Much of the rest goes into property, and loans to big corporations that value short-term profit over the welfare of planet and people – fossil energy, mining, factory farming, mass media, consumer goods, processed food, the military etc.

4. Toxic vs Healthy Economy…Although in good times the economy appears to grow, growth no longer signifies health. Property prices inflate beyond the reach of many: notably, your descendants. Private monopolies supplant public services and local business, and we become increasingly dependent upon them for life essentials, employment, and a functional economy…

5. Government… So where are they in all this? Precisely! As mentioned in (2.), they’ve handed over the lion’s share of the responsibility for creating and managing the nation’s money to the financial sector. They’ve also permitted a few banks, and other monopolies, to grow so large and powerful that political success now hangs upon prioritising their interests over those of their electorate (with over half of Conservative Party funding now reliant on the banking sector and much of the remainder coming from defence, manufacturing and energy, is it any surprise that voter needs should come second to their sponsors’ return on their investment?) Whilst Whitehall may maintain the illusion of steering the British economy, technically they can’t because they’ve abdicated the controls.

And so the Vicious Circle turns, with each cycle the system becoming more unequal, uniform and unstable. There are three particularly vicious aspects of this system worth noting.

Firstly, it functions irrespective of recession. In boom, you borrow to get the things to which you aspire now rather than having to wait – using credit / store cards, bank loans, mortgages and the like – and the banks get rich and powerful. In bust, you borrow to make ends meet and the banks get rich and powerful.

Secondly, in a recession, because the vast majority of the money in the system is ‘borrowed’, to prioritise the repayment of the bank-invented debt (i.e. ‘Austerity’) over strategies for stimulating spending  is guaranteed to shrink the economy further. Simply put, if pennies are taken out of the national purse and vanish into thin air without any being put back in, there will be less money in the purse. Unless, of course, we can find a bank to lend us a more.

Thus, whilst the historically-proven formula for economic recovery has always been to kickstart the Virtuous Circle through public spending and corporate regulation, in this sick misshapen world, crashes, austerity, privatisation and price hikes are great because they force us to borrow more, which  indirectly results in new ‘imaginary’ money getting injected into the economy (arrow 1A).

And although a life of indebtedness for food, housing, clothes, education and so on, may promise an increasingly bleak existence for us and our children, for the environmentally-unconscious one-stop corporate shop that creates our credit, charges our interest, employs us as temps at the minimum wage, and is the only place where we can buy anything, it’s a field day.

Lastly, the unsustainability of this rampant money creation is largely irrelevant to the banks because, ultimately, the public debt is underwritten by the Bank of England, in other words, US! You, yes YOU, are effectively part-guarantor of everybody’s loan, including your own. The bubble will always burst, and more spectacularly each time, and it’ll always be you that is liable for the debt, never those that made billions from the recklessness.

Happily, fixing the system is remarkably simple. You have two choices. The easiest is to pick up the phone and (1) MOVE YOUR MONEY out of the Vicious Circle and into an ethical bank such as The Coop or Triodos, who maintain a responsible lending policy, consult you on your ideas for a better future and invest in them – organic farming, renewables, community development and so on – rather than whatever horror brings in the profits. Do it now and enjoy looking your children in the eye with a clear conscience!

(2) is to PUT PRESSURE ON YOUR GOVERNMENTAL SERVANTS to re-impose the vital framework that regulated the Virtuous Circle.

Most critically, this means returning the responsibility for money creation to The Bank of England. Exercise of this responsibility should involve the immediate injection of real cash into circulation (‘quantitative easing’) via investment in a growing public sector and green transition. This would reduce our economy’s toxic dependence on debt to function, generate employment and spending (the only way out of recession), and begin the change upon which a tolerable future hinges.

Close second, however, involves excising the corporate influence from our political system and allowing the democratic needs of citizens to determine Governmental decision-making, and not the insatiable greed of a small commercial oligarchy.

Thirdly, the ‘ecology’ of the financial sector should be regulated so that a significant percentage of banks are always focused on investment at the local level. This is the approach in Germany, and the greater diversity and stability of their banking system has enabled them to weather the present storm significantly better than most.

In short, if you wish to remain in a world where you are dependent on corporate monopolies for your existence, and where the conditions of your life and planet are certain to deteriorate, then sit back and do nothing. However, if you’d prefer a return to a financial system that works towards the common good then MOVE YOUR MONEY NOW!

A concluding thought: in The Early Middle Ages we were told the Bible was only comprehensible and communicable by The Church. It was a tale that, for a considerable time, maintained vision, interpretation, practice and power in the hands of an elite few.

Arguably, the translation of the Bible from Latin into English and its popular dissemination was one of the driving forces behind the development of the more market led and equitable society of later centuries. Knowledge, as they say, is power.

In the c21st our ‘mystery’ is The Economy, our priests: the politicians, economists and bankers.  Pah! Economics is easy, isn’t it? It’s just about how we can make money work best for us and our loved ones.

So go on: inform your friends and family. Ask them to move their money too. It’s time to debunk the ‘priesthood’ and reclaim control over our lives, planet and future. Forever and ever. Amen!

Want to know more? Arkadian highly recommends following Positive Money or the New Economics Foundation on Facebook, or watching the illuminating video below. Learn and share!:

Why Corporate Regulation is a Socioenvironmental Necessity. Part 3 of 5: Why does A Diverse System = A Stable System?

Delighted that you’ve joined us for the third installment of our first Arkadian analysis for 2012, where over five short articles, we will show how we reached the series title’s conclusion by way of the following question: –

“What difference between natural / social systems and the current economic system causes the former to tend towards diversity and stability, and the latter, uniformity and instability?”

In Weeks 1 and 2, we investigated why ecosystems and ‘civilisation’ tend towards diversity and stability. It was proposed this was attributable to virtuous dynamics that promote long-term systemic stability and resilience by driving increasingly fine-grained specialisation / cooperation, whilst inhibiting environmental dominance by particular species or social ‘groups’.

Next week we will be putting forward an explanation as to why the current economic system displays the reverse trend but, for now, we thought it worthwhile to explain briefly the connection between diversity and stability. Why exactly does a change in the former result in a like change in the latter?  

Put simply, in a diverse system, the health of the whole (‘productivity’) isn’t dependent on the performance of only a few parts.

For example, imagine a disadvantaged family where Dad is the only breadwinner. If he has an accident, no-one eats. If the house blows down in a storm, there’s no-one to rebuild it. Compare the situation with a second family where several other members also contribute to the household income. Because ‘productivity’ is distributed across several people, the overall family ‘system’ is much more able to adapt to an accident-prone Dad and / or a force majeure.

A classic instance of systemic over-dependency at a macro-societal level is Ancient Egypt, which teetered on a single variable: the annual flooding of the Nile (taken from the excellent ‘Water’ by Steven Solomon). The ‘inundation‘, as it was known, rejuvenated the plains with fertile silt and washed away soil poisons, to produce the most self-sustaining and fertile farmlands of the ancient world.

The exclusive focus of the political elite was water management: senior priest-managers led departments for overseeing dikes, canal workers and measuring river levels; and top dog, Pharaoh’s, fundamental godly responsibility was mastery of the flow of the great river.

Unsurprisingly then, the Nile and Egyptian history ebb and flow in perfect synchronicity. Without exception, the Old, Middle, and New Kingdoms, as well as the later periods of Greek and Byzantine rule, bloom with the return of the regular cycle of flooding and crumple with climactic dry periods into centuries of disunity, chaos and foreign invasions. Thus, despite many environmental blessings, ultimately, the stability and resilience of this mighty civilisation and its elite were slave to the caprices of its one water source, in a way that a country with abundant springs, rivers and lakes could never be.

Our third and final example – the current economic downturn – illustrates uniformity and instability at a global level. Here, the world’s banking system was rendered so fragile by the interdependency of a few titanic banks and financial services firms, that massive external intervention was required to prevent total meltdown when one of them, Lehman Brothers, filed for bankruptcy in 2009. It is a crisis and an intervention for which we shall all suffer for many decades to come.

But why had the economic system not behaved like the natural / social systems we looked at in Weeks 1 and 2, and become increasingly diverse and stable as it expanded? We hope you’ll drop in next Friday to find out.

Why Corporate Regulation is a Socioenvironmental Necessity. Part 1 of 5: Why do Ecosystems tend towards Diversity and Stability?

Happy New Year and welcome to our first Arkadian analysis of 2012. Over the next five weeks we will be working towards the conclusion of the title of the series by exploring the answer to a simple question: –

“What difference between natural / social systems and the current economic system causes the former to tend towards diversity and stability, and the latter, uniformity and instability?”

In a world where the latter now poses a mortal threat to the former, we considered this to be a question of some significance. Could we learn from the way natural / social systems self-regulate in a way that benefits all, to design an ecologically-and-socially-just economic system?

Our analysis will be set out in five short articles, launching Friday mornings throughout January and early February: –  

(1) Why do Ecosystems tend towards Diversity and Stability? Friday 6th January 2012.

(2) Why does (did) Civilisation tend towards Diversity and Stability? Friday 13th January 2012. 

(3) Why do Diverse Systems = Stable Systems? Friday 20th January 2012. 

(4) Why does the Current Economic System tend towards Uniformity and Instability? Friday 27th January 2012. 

(5) How do we create a Diverse and Stable Economic System? Friday 28th September 2012. 

So without further ado, let’s move onto our first question of the series:
Why do Ecosystems tend towards Diversity and Stability?

As a general rule the longer that ecosystems remain undisturbed by external factors, the richer they become. The oldest – the rainforests – are estimated to hold over half of all species, despite covering only 6% of the Earth’s surface. Why should 70m years of evolution against a backdrop of dynamic climate fluctuations give rise to increasing variety and not just a few dominant species?

MODEL 1 of our analysis below proposes an answer (N.B. If you have trouble reading the text, click on the diagram to open it in a new browser tab and then refer back to the explanation here).

Begin at the topmost variable and follow the arrows clockwise around the loop. (1) Put yourself in the position of a species that pursues total dominance over its local environment. (2) Despite considerable early successes, it’s not long before your manipulation and consumption begin to impact adversely on other species. (3) As local biodiversity diminishes, so too do the health, resilience and stability of the ecosystem as a whole, (4) resulting in ever-tighter constraints on your actions and, ultimately, the collapse of the environment upon which your own survival depends. (5) Your extinction kills off that suicidal gene that motivated your thirst for dominance, leaving an open stage for adaptive strategies that promote ecosystemic diversity and stability.

Thus, coming full circle, (1) Your Environmental Dominance Strategy proved self-defeating because it led to Ecosystemic Weaknesses that constrained and, ultimately, negated, You! In Systems Dynamics a feedback loop like this where the impact of a variable is reduced by the effects it causes is called a ‘Balancing Circle’.

A further notable dynamic here is a pair of ‘Virtuous Circles’ (feedback loops where one delight leads to effects that enhance the first delight, and so on), which we’ve termed the ‘The Diversity Engine’.

Here, (6a) the more the processes of natural selection incline towards interdependence, the more opportunities are opened up for new evolutionary adaptations. Thus, through increasingly fine-grained cooperation and specialisation between species, diversity itself drives diversity.

Moreover, as the environment grows ever more rich and complex, (6b) species dominance becomes increasingly futile and improbable, removing a further constraint on the trend towards diversity. And so both circles turn.

But (we hear you say) isn’t there a species that has had a radical effect on its local environment but has (thus far) escaped extinction? We hope you’ll drop in next Friday for Part 2, when we shall be exploring the curious exception of Homo Sapiens.